Securities Investor Protection Corporation

• Decision Date: 03 May 2010
• Docket Number: Adversary No. 08-01789(BRL),10-03114(BRL).
• Citation: 429 B.R. 423
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.In re: Bernard L. Madoff, Debtor.Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,v.Adele Fox, individually and to the extent she purports to represent a class of those similarly situated, and Susanne Stone Marshall, individually and to the extent she purports to represent a class of those similarly situated, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

429 B.R. 423

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

In re: Bernard L. Madoff, Debtor.

Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,

v.Adele Fox, individually and to the extent she purports to represent a class of those similarly situated, and Susanne Stone Marshall, individually and to the extent she purports to represent a class of those similarly situated, Defendants.

Adversary Nos. 08-01789(BRL), 10-03114(BRL).

United States Bankruptcy Court S.D. New York.

May 3, 2010.

COPYRIGHT MATERIAL OMITTED

David J. Sheehan, Marc E. Hirschfield, Deborah H. Renner, Keith R. Murphy, Seanna R. Brown, Baker & Hostetler LLP, New York, NY, for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.

Helen Davis Chaitman, Peter W. Smith, Becker & Poliakoff LLP, New York, NY, Attorneys for Adele Fox and Susanne Stone Marshall, individually and a similarly situated class.

MEMORANDUM ORDER AND DECISION GRANTING TRUSTEE'S MOTION PURSUANT TO BANKRUPTCY CODE SECTIONS 362(a) AND 105(a) AND BANKRUPTCY RULE 7065 FOR ENFORCEMENT OF THE AUTOMATIC STAY AND FOR A PRELIMINARY INJUNCTION

BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the Order to Show Cause (the “Motion”) of Irving H. Picard, Esq. (“Trustee”), trustee for the substantively consolidated Securities Investor Protection Act ¹ (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”), seeking an order pursuant to inter alia, sections 362(a) and 105(a) of the Bankruptcy Code (the “Code”) and Rule 7065 of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”) (i) enforcing the automatic stay and declaring the actions (the “Florida Actions,” or the “Actions”) brought by Adele Fox (“Fox”) and Susanne Stone Marshall (“Marshall,” and together with Fox, the “Florida Plaintiffs”) against the estate of Jeffry M. Picower and related entities (the “Picower Defendants”) in the United States District Court for the Southern District of Florida, West Palm Beach Division, Case Nos. 10-80252 and 10-80254 void ab initio; and (ii) enjoining the Florida Plaintiffs from litigating the Florida Actions, or any other actions against the Picower Defendants, pending a final order of the Court approving the Trustee's settlement with the Picower Defendants.

For the reasons set forth below and at oral argument, the Motion is hereby GRANTED to the extent set forth herein.

BACKGROUND²

I. Procedural Background

As is well known, on December 11, 2008, Madoff was arrested by federal agents for perpetrating a multi-billion-dollar securities fraud scheme through his investment company, BLMIS. Madoff was charged with violations of SIPA sections 78j(b) and 78ff, and 17 C.F.R. section 240.10b-5 in the United States District Court for the Southern District of New York (the “District Court”). United States v. Madoff, No. 08-MJ-02735.³ Also on December 11, 2008 (the “Filing Date”), the Securities and Exchange Commission (the “SEC”) filed a civil complaint alleging inter alia, that Madoff and BLMIS were operating a Ponzi scheme through BLMIS's investment advisor activities. This proceeding is ongoing before the District Court. S.E.C. v. Madoff, No. 08-CV-10791.

On December 15, 2008, the District Court granted the Securities Investor Protection Corporation's (“SIPC”) application to place BLMIS customers under the protections of SIPA (the “Protective Order”). The Protective Order appointed Picard as trustee for the liquidation of the business of BLMIS and removed the SIPA liquidation proceeding to this Court pursuant to SIPA sections 78eee(b)(3) and (b)(4).

On March 12, 2009, Madoff pled guilty to an 11-count criminal indictment and admitted that he “operated a Ponzi scheme through the investment advisory side of [BLMIS].” United States v. Madoff, No. 09 CR 213(DC), Plea Hr'g Tr., Docket No. 57, at p. 23. On June 29, 2009, Madoff was sentenced to 150 years in prison.

II. The SIPA Trustee's Authority and the Claims Administration Process

In addition to the powers granted by SIPA, the Trustee has the general powers of a bankruptcy trustee. See SIPA §§ 78fff-1(a), 78fff-1(b). He is charged with assessing claims, recovering and distributing customer property to BLMIS customers, and liquidating the assets of BLMIS for the benefit of the estate and its creditors.

On December 23, 2008, the Court entered an Order Approving Form and Manner of Publication and Mailing of Notices; Specifying Procedures For Filing, Determination, and Adjudication of Claims; and Providing Other Relief (the “Claims Procedure Order”), setting forth a systematic framework for the filing, determination and adjudication of claims in accordance with SIPA. Pursuant to the Claims Procedure Order, all customer claims are filed with the Trustee, who must determine the claims in writing. If the claimant does not object to the determination, it is deemed approved by the Court and binding on the claimant. If the claimant objects and files an opposition, the Trustee must obtain a hearing date and notify the claimant thereof. See Peskin v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 413 B.R. 137 (Bankr.S.D.N.Y.2009) (expounding generally on the claims administration process).

III. The Satisfaction of Customer Claims in a SIPA Liquidation

The statutory framework for the satisfaction of customer claims in a SIPA liquidation proceeding provides that customers share pro rata in customer property ⁴ to the extent of their net equities, as defined in SIPA section 78 lll (11) (“Net Equity”). See SIPA § 78fff-2(c)(1)(B). If the fund of customer property is insufficient to make customers whole, the trustee is entitled to an advance from SIPC to pay each customer the amount by which his Net Equity exceeds his ratable share of customer property, subject to a cap of $500,000 for securities claims. See SIPA § 78fff-3(a).

On March 1, 2010, after briefing and oral argument, the Court issued a decision (the “Net Equity Decision”) approving the Trustee's method of calculating a customer's Net Equity as the amount of cash deposited into the customer's BLMIS account, less any amounts withdrawn from the customer's BLMIS account (the “Net Investment Method”). See SIPC v. BLMIS, 424 B.R. 122, 135, 140 (Bankr.S.D.N.Y.2010). The Court entered an order implementing its Net Equity Decision on March 8, 2010 (the “Net Equity Order”). The Net Equity Decision and Order, in accordance with SIPA and controlling Second Circuit precedent, upheld the Trustee's determination to allow claims in the amount of customers' net investments, denying claims of those customers whose withdrawals exceeded their initial investments and subsequent deposits. The Court's Net Equity Decision and Order held that the fictitious profits listed on customers' last BLMIS account statements as of the Filing Date were not controlling for purposes of determining customers' Net Equity claims. The Florida Plaintiffs are obviously disappointed at the economic impact on them from this Court's Net Equity decision.⁵

On March 16, 2010, the Court, on its own motion, joined by the requests of certain parties, certified its Net Equity Order for immediate appeal to the United States Court of Appeals for the Second Circuit pursuant to 28 U.S.C. section 158(d)(2). See SIPC v. BLMIS, Adv. Pro. No. 08-01789(BRL), Docket No. 2022. Notices of appeal from the Court's Net Equity Order were filed by counsel for a number of customers, including counsel for the Florida Plaintiffs.⁶See id. at Docket No. 2048.

IV. Participation of Marshall and Fox in the SIPA Liquidation of BLMIS

Both Marshall and Fox have filed customer claims in this SIPA liquidation pursuant to the Claims Procedure Order. Marshall filed a claim with respect to one BLMIS account on January 14, 2009, claim number 000402. See Sheehan Aff. in Supp. of Trustee's App. (“Sheehan Aff.”) at ¶ 3, Ex. A. Fox filed two claims for two separate BLMIS accounts on February 13, 2009, claim numbers 002269 and 002270. See id. at ¶ 3, Ex. E.⁷

Marshall's claim was deemed allowed by the Trustee on July 24, 2009 in the amount of $30,000, the amount that Marshall deposited into the account, with no withdrawals. See id. at ¶ 3, Ex. B. Marshall received a payment from the Trustee of funds advanced by SIPC against her Net Equity claim on August 21, 2009. Id. at Ex. D. Before receiving payment, Marshall executed an assignment and release of any claims against BLMIS or third parties for inter alia, any illegal or fraudulent activity with respect to her BLMIS account that gave rise to her customer claim against BLMIS. See id. at Ex. C (“Marshall ... in consideration of the payment of $30,000.00 to satisfy her claim for customer protection ... does for herself hereby assign, transfer and set over to ... Trustee ... and SIPC ... any and all rights, including causes of action or claims ... against BLMIS and/or any third party arising out of ... any fraudulent or illegal activity with respect to [her] BLMIS account ... which gave rise to the allowed Customer Claim....”). As of the Filing Date, Marshall's BLMIS account statement listed a balance of $202,836.91.⁸ Marshall Decl. at ¶ 2.

Fox's claims have not yet been determined by the Trustee. According to the Florida Plaintiffs, the Trustee has determined that Fox has a negative net investment, having withdrawn more than she deposited from her BLMIS accounts, resulting in a Net Equity of zero dollars under SIPA and the Net Equity Decision. See Defs.' Mem. of Law at p. 4. As of the Filing Date, Fox's BLMIS account statements listed balances of approximately $887,420 and $1,948,718. Id.

V. The Trustee's Pending Adversary Proceeding Against, and Settlement Negotiations with, the Picower Defendants

On May 12, 2009, the Trustee filed a complaint against the Picower Defendan...